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News outlets from all corners have been paying close attention to the ongoing battle for GameStop stock between Wall Street hedge funds and the subreddit r/WallStreetBets.
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When WallStreetBets discovered that many hedge funds were betting against GameStop, they realized that if enough people bought GameStop stock, they could drive up the price and force the hedge funds to repurchase it at an inflated price.
As the window slowly closes, it looks like the hedge fund is set to lose billions over the GameStop stock battle. Many of them are crying foul and calling for greater market regulation.
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GameStop, market manipulation, and the privileged few
While there is a lot of financial and market trickery that readers will need to know about to be able to understand what is going on, there are a number of far more qualified individuals that have already gone to great lengths to explain what is going on.
It’s true that if GameStop stock continues to trend upwards that many multi-billion dollar hedge funds could effectively go bankrupt. They will have to pay incredibly high premium prices for GameStop shares, which had been worth less than $20 a month ago.
In their attempts to avoid this outcome, these hedge funds have spent the last few days trying to find some way to avoid having to take responsibility for their investments. They've called for government intervention, corporate intervention, and made attempts to frame this event as an illicit scheme.
But this attempt to control the narrative actually reveals an unfortunate truth about Wall Street.
Rules for thee, not for me
It’s no secret that stock trading is an inaccessible and risky venture for anyone not well-versed in the world of Wall Street to undertake. Money managers, financial institutions, and more get paid incredibly well to use their knowledge to help even wealthier individuals win big at the markets.
For the common citizen, however, it’s much more difficult to break into the world of Wall Street. It seems like these multi-billion dollar entities have fixed the system against anyone who doesn’t use their services.
With the GameStop stock, however, the tables have turned. Small-time investors are in a superior position than the corporate investors.
To hit back at independent investors, hedge fund managers have managed to get Robinhood to restrict users from buying more GameStop stock. This is an act of corporate regulation meant to shift the tides against these individual investors.
Well-connected individuals have decried this GameStop short squeeze as market manipulation. This is a little hollow coming from people whose careers are made by market manipulation.
Markets are changed whenever any action is taken. Putting a stock up for sale increases supply and lowers the price; while buying a stock reduces supply, and icreases the price.
Similarly, shorting a stock increases supply and lowers prices, with the caveat that the short seller is actually hoping the stock price drops.
These aren’t secrets. These are the fundamental laws of market economics that hedge fund managers have taken advantage of for years. While an independent trader could never hope to buy enough stock to take advantage of these natural fluctuations, multi-billion dollar hedge funds have been taking advantage of their own market influence for years.
The only reason anyone is asking to put a stop to this is because, in this case, the losing side are the wealthy traders and not the independent investors.
What is fair and what is expected
Through the course of the backlash surrounding the GameStop short squeeze, it’s revealing that the main complaints seem to be rooted in the fact that these events go against the expectations of established traders.
Established traders expect that they will have the advantage over independent traders. They expect others losses to be their gains. They expect the government and corporate entities to maintain the status quo.
The expectation is that poor investors, who attempt to break into the markets, will lose and wealthy investors will win.
In an interview on CNBC, Chamath Palihapitiya raised the point that 140% of GameStop shares were shorted, a mathematical impossibility under normal conditions. These are the kinds of market manipulations that are considered acceptable by established traders.
The idea that this bet, this multi-billion dollar gamble, would be discovered and used against the hedge fund was never even considered.
According to CNBC themselves, in early 2020, the top 1% owned 51.8% of all stocks, and as much as 88% of all stock value, while the bottom 50% of American households owned just 0.7%.
The problem for Wall Street isn’t that the markets aren’t regulated enough to prevent shady behavior. It’s that wealthy people stand to lose and average people stand to gain.
Regardless of how this plays out, anyone following the GameStop story should be skeptical of wealthy investors who are upset that their own schemes are being used against them.
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